An alternative investment is a financial asset that usually does not fall into one of the conventional  categories of equity, income or cash. Private equity or venture capital, hedge funds, real property, commodities, and tangible assets are all examples of alternative investments.

An alternative investment is an investment in any asset that does not include stocks, bonds, and cash. The term is a relatively loose one and includes tangible assets such as precious metals, art, wine, antiques, coins, or stamps and some financial assets such as real estate, commodities, private equity,  hedge funds, exchange funds, venture capital, film production, financial derivatives, and cryptocurrencies.

Investments in commodities, real estate, forestry and shipping are also often termed "alternative" although the use of such real assets to enhance and preserve wealth have been around since ancient times. 

■■  Private equity: investments in private companies— companies that are not listed on a stock exchange

■■  Real estate:  investments in raw land and buildings, both commercial and residential.

■■  Commodities: investments in physical products, such as precious and base metals (gold, copper, silver), energy products (oil), and agricultural products that are typically consumed (corn, cattle, wheat, produce) or used in the manufacture of goods (lumber, cotton, sugar)

Private equity, real estate, and commodities are all considered alternative because they represent an alternative to investing exclusively in “traditional” asset classes, such as debt and equity securities. 

Although alternative investments have gained prominence in the 21st century, they are not new; in fact, real estate and commodities are among the oldest types of investments.

Global research has shown that 94% of investors hold some form of alternative investment. Regarding their holdings of different assets, on average, 72% of portfolios are invested in commodities and private real estate. Magenta is an easy way to be invested across a wide range of alternatives including commodities and real estate.

Advantages of Alternative InvestmentsInvestors add alternative investments to their portfolios for two main reasons:

■■  to enhance returns and

■■  to reduce risk by obtaining diversification benefits.

Enhancing Returns.  Between 1990 and 2009, investments in private equity and real estate have outperformed investments in equity and debt securities. Have you ever heard the expression "never put all of your eggs in one basket"? Wealthy investors know that diversification is key to portfolio growth year after year. At Magenta we offer inclusion in some investments once only reserved for the wealthy, including; real estate, commodities, and more. 

We are not saying stocks or bonds are bad. As an investor however, you should not rely entirely on stocks as an investment and use diversification to reduce risk.

Reducing Risk. Investors rarely allocate all their money to one type of asset or security. Instead, they diversify their portfolios by investing in assets and securities that behave differently from each other. Combining assets or securities in a portfolio provides diversification benefits and thus reduces the risk in the portfolio. In other words, the risk to the portfolio of including these two assets or securities is lower than the weighted sum of the risks of the two assets or securities. Because there is a relatively low correlation between different types of alternative investments and also between alternatives and other asset classes, adding private equity, real estate, and commodities to portfolios helps investors reduce risk.

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